MIDTERM SAMPLE TEST

____ 1. Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 10.0% interest,
compounded annually. How much will you have when the CD matures?

a. $4,876.24
b. $5,187.48
c. $4,772.49
d. $5,291.23
e. $3,942.49

____ 2. Suppose the U.S. Treasury offers to sell you a bond for $667.25. No payments will be made until the bond
matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if
you bought this bond at the offer price?

a. 7.67%
b. 6.83%
c. 9.02%
d. 8.43%
e. 6.49%
____ 3. Janice has money invested in a bank that pays 8.0% annually. How long will it take for her funds to triple?

a. 11.56 years
b. 16.13 years
c. 15.27 years
d. 11.13 years
e. 14.27 years

____ 4. What is the PV of an annuity due with 5 annual payments of $8,600 at an interest rate of 5.5%?

a. $38,744.29
b. $40,294.06
c. $47,268.04
d. $46,105.71
e. $36,807.08

____ 5. What's the rate of return you would earn if you paid $3,080 for a perpetuity that pays $85 per year?

a. 2.07%
b. 2.87%
c. 2.76%
d. 3.12%
e. 2.68%
____ 6. You sold a car and accepted a note with the following cash flow stream as your payment. What was the
effective price you received for the car assuming an interest rate of 6.0%?

Yr: 0 1 2 3 4
CFs: $0 $1,000 $2,000 $2,000 $2,000

a. $5,987
 Version A

b. $4,730
c. $5,209
d. $6,166
e. $5,628

____ 7. You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the
24th month, you will have $12,850 in your account. If the bank compounds interest monthly, what nominal
annual interest rate will you be earning?

a. 6.85%
b. 5.28%
c. 5.67%
d. 6.65%
e. 6.52%

____ 8. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their
monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's effective
annual rate (EFF%)?

a. 18.78%
b. 17.02%
c. 19.56%
d. 24.45%
e. 23.67%
____ 9. Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 9.0% but with
equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of
principal?

a. 113.29%
b. 92.11%
c. 78.29%
d. 77.37%
e. 99.48%
____ 10. Assume that interest rates on 20-year Treasury and corporate bonds are as follows:

T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18%

The differences in these rates were probably caused primarily by:

a. Real risk-free rate differences.
b. Maturity risk differences.
c. Default and liquidity risk differences.
d. Inflation differences.
e. Tax effects.

____ 11. The real risk-free rate is 3.05%, inflation is expected to be 4.25% this year, and the maturity risk premium is
zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?
 Version A

a. 7.23%
b. 7.30%
c. 6.06%
d. 6.13%
e. 8.32%
____ 12. Suppose 10-year corporate bonds have a yield of 8.75%. The real risk-free rate is r* = 2.5%, the default risk
premium DRP is 0.25%, liquidity premium is LP =1.65% and the maturity risk premium on corporate 10-year
bonds is 1.15%. What is the inflation premium (IP)?
a. 3.30%
b. 3.33%
c. 3.20%
d. 2.59%
e. 2.82%

____ 13. Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest
payment of $65. The market requires an interest rate of 7.3% on these bonds. What is the bond's price?
a. $1,000.42
b. $952.78
c. $876.56
d. $914.67
e. $809.86
____ 14. Adams Enterprises’ noncallable bonds currently sell for $1,110. They have a 15-year maturity, an annual
coupon of $85, and a par value of $1,000. What is their yield to maturity?
a. 7.34%
b. 8.65%
c. 7.49%
d. 7.71%
e. 7.27%
____ 15. Sadik Inc.'s bonds currently sell for $1,030 and have a par value of $1,000. They pay a $105 annual coupon
and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?

a. 10.83%
b. 11.28%
c. 11.50%
d. 9.47%
e. 10.72%
____ 16. At time 0, Malko Enterprises’ bonds sell for $1,150. The bonds have a 10 year maturity, an annual coupon of
$100, and a par value of $1,000. What is their expected current yield in the first year?

a. 7.14%
b. 7.50%
c. 7.88%
d. 8.70%
e. 10.00%
 Version A

____ 17. Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of
9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an
9.6% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay
for the bond?

a. $852.41
b. $1,199.33
c. $1,169.59
d. $911.89
e. $991.18
____ 18. XYZ Inc.'s bonds currently sell for $1,275. They pay a $90 annual coupon, have a 25-year maturity, and a
$1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call
premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal,
with rates expected to remain at current levels on into the future. What is the difference between this bond's
YTM and its YTC? (i.e. Subtract the YTC from the YTM)

a. 3.00%
b. 3.30%
c. 2.92%
d. 3.32%
e. 2.60%
____ 19. O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield
to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $925. What is the bond's
nominal coupon interest rate?

a. 7.46%
b. 10.09%
c. 8.48%
d. 7.80%
e. 6.36%
 Version A

Answer Section

1. ANS: B
N 10
I/YR 10
PV -2,000
PMT 0
CPT FV $5,187.48

FV=PV*(1+I)^N=2000*(1+10%)^10=5187.48

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire an understanding of the time value of money.
TOP: (5.2) FV of a lump sum
2. ANS: D
N 5
PV -667.25
PMT 0
FV 1,000.00
CPT I/YR 8.43%

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire an understanding of the time value of money.
TOP: (5.4) Finding I
3. ANS: E
I/YR 8
PV -1.00
PMT 0
FV 3.00
CPT N 14.27

PTS: 1 DIF: EASY/MED NAT: Analytic skills

LOC: Students will acquire an understanding of the time value of money.
TOP: (5.5) Finding N
4. ANS: A
Change to BEGIN Mode: 2ND BGN, 2nd SET, 2nd QUIT;

N 5
I/YR 5.5
PMT 8,600
FV 0.00
CPT PV -38,744.29

Change back to END Mode: 2ND BGN, 2nd SET, 2nd QUIT;
PTS: 1 DIF: EASY NAT: Analytic skills
LOC: Students will acquire an understanding of the time value of money.
TOP: (5.9) PV of annuity due

5. ANS: C
 Version A

Cost (PV) $3,080

PMT $85
I/YR 2.76%

PV of PERP=PMT/I; I=PMT/PV=85/3080=0.0276=2.76%
PTS: 1 DIF: EASY NAT: Analytic skills
LOC: Students will acquire an understanding of the time value of money.
TOP: (5.11) Return on a perpetuity
6. ANS: A
I/YR = 6.0%
0 1 2 3 4
CFs: $0 $1,000 $2,000 $2,000 $2,000
PV of CFs: $0 $943 $1,780 $1,679 $1,584
PV = $5,987 Found by summing individual PVs.
PV = $5,986.81 Found using the calculator NPV key.

Press CF, input CF0=0, CO1=1000, down button, FO1=1, down button;
CO2=2000, down button, FO2=3, down button and check there are no other cash flows.
Press NPV, input I=6, down button, CPT NPV

PTS: 1 DIF: MEDIUM NAT: Analytic skills

LOC: Students will acquire an understanding of the time value of money.
TOP: (5.12) PV of uneven cash flows
7. ANS: E
Change to BEGIN Mode: 2ND BGN, 2nd SET, 2nd QUIT

N 24
PV 0
PMT -500
FV 12,850
CPT I/Y 0.54%
I/YR 0.54%*12= 6.52%

Change back to END Mode: 2ND BGN, 2nd SET, 2nd QUIT
PTS: 1 DIF: HARD NAT: Analytic skills
LOC: Students will acquire an understanding of the time value of money.
TOP: (5.10) Finding I: annuity due
8. ANS: C
APR = Nominal rate 18.00%
Periods/yr 12
EFF% =(1+(I NOM/M))^ - = 19.56%
1

2nd , ICONV, NOM=18, down button twice, C/Y=12, up button, CPT EFF
PTS: 1 DIF: MEDIUM NAT: Analytic skills
LOC: Students will acquire an understanding of the time value of money.
TOP: (5.16) APR vs. EFF%
9. ANS: B
 Version A

Step 1: Calculate the monthly Payment

N 12
(rNOM 9.0%)
I/Y=Periodic r 9/12=0.75
PV 72,500
FV 0
CPT PMT -6,340

Step 2: Calculate the 2nd month payment that goes toward the repayment of principal.
2nd AMORT, P1=P2=2, press down button multiple times until you see PRN = -5839.9557

Step 3: Solve for the percentage of 2nd month payment that goes to repayment of principle.
% prin. = Prin2 / PMT = 5839.9557 / 6340 = 92.11%

An alternative way for step 2 (calculating the principal repayment in the 2 nd month) is using amortization
table:
Amortization schedule(first 12 months)
Month Beg. Balance Payment Interest Principal Ending Balance
1 $72,500.00 $6,340 $543.75 $5,796.48 $66,703.52
2 $66,703.52 $6,340 $500.28 $5,839.96 $60,863.56
3 $60,863.56 $6,340 $456.48 $5,883.76 $54,979.81
4 $54,979.81 $6,340 $412.35 $5,927.88 $49,051.92
5 $49,051.92 $6,340 $367.89 $5,972.34 $43,079.58
6 $43,079.58 $6,340 $323.10 $6,017.14 $37,062.45
7 $37,062.45 $6,340 $277.97 $6,062.26 $31,000.18
8 $31,000.18 $6,340 $232.50 $6,107.73 $24,892.45
9 $24,892.45 $6,340 $186.69 $6,153.54 $18,738.91
10 $18,738.91 $6,340 $140.54 $6,199.69 $12,539.22
11 $12,539.22 $6,340 $94.04 $6,246.19 $6,293.03
12 $6,293.03 $6,340 $47.20 $6,293.03 $0.00

PTS: 1 DIF: HARD NAT: Analytic skills

LOC: Students will acquire an understanding of the time value of money.
TOP: (5.18) Amortization: % of pmt. toward principal
10. ANS: C PTS: 1 DIF: MEDIUM NAT: Analytic skills
LOC: Students will acquire knowledge of financial markets, institutions, and interest rates.
TOP: (6-5) Default risk premium
11. ANS: B
Real risk-free rate, r* 3.05%
Inflation this year 4.25%
1-year bond yield: r RF = r* + IP 7.30%

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire knowledge of financial markets, institutions, and interest rates.
TOP: (6-3) Interest rates
12. ANS: C

r 8.75%
 Version A

r* 2.50%
LP 1.65%
DRP 0.25%
MRP 1.15%
r= r* + IP + MRP + DRP + LP
IP = r - r* - MRP - DRP - LP
= 8.75%-2.5%-1.15%-0.25%-1.65%=3.20%

PTS: 1 DIF: MEDIUM NAT: Analytic skills

LOC: Students will acquire knowledge of financial markets, institutions, and interest rates.
TOP: (6-5) Default risk premium
13. ANS: B
N 8
I/YR 7.3
PMT 65
FV 1,000
CPT PV -952.78

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire an understanding of stocks and bonds.
TOP: TOP: (7-3) Bond valuation: annual
14. ANS: E
N 15
PV -1,110
PMT 85
FV 1,000
CPT I/YR 7.27%

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire an understanding of stocks and bonds.
TOP: TOP: (7-4) Yield to maturity
15. ANS: B
N 5
PV -1,030
PMT 105
FV 1,100
CPT I/YR = YTC 11.28%

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire an understanding of stocks and bonds.
TOP: TOP: (7-4) Yield to call
16. ANS: D
PV $1,150
PMT $100
Current yield 100/1150=8.70%

PTS: 1 DIF: EASY NAT: Analytic skills

 Version A

LOC: Students will acquire an understanding of stocks and bonds.

TOP: TOP: (7-4) Current yield
17. ANS: E
Par value $1,000 (FV)
Coupon rate 9.5%
Periods/year 2
Yrs to maturity 20
Periods = Yrs to maturity Periods/year 40 (N)
Required rate 9.6%
Periodic rate = Required rate / 2 = I/YR 4.80% (I/Y)
PMT per period = Coupon rate/2 Par value $47.50 (PMT)
Maturity value = FV $1,000
CPT PV $991.18

PTS: 1 DIF: EASY NAT: Analytic skills

LOC: Students will acquire an understanding of stocks and bonds.
TOP: TOP: (7-6) Bond valuation: semiannual
18. ANS: C
If held to maturity: If called in 5 years:
N = Maturity 25 N = Call 5
Price = PV $1,275 PV $1,275
PMT $90 PMT $90
FV = Par $1,000 FV = Call Price $1,050
I/YR = YTM 6.70% I/YR = YTC 3.79%
Difference: YTM - YTC = 2.92%

PTS: 1 DIF: MEDIUM NAT: Analytic skills

LOC: Students will acquire an understanding of stocks and bonds.
TOP: TOP: (7-4) YTM and YTC
19. ANS: C
First, use the data provided to find the dollar coupon payment per 6 months, then multiply by 2 to get the
annual coupon, and then divide by the par value to find the coupon rate. One could use the indicated data and
solve for the price. It would be $925, which confirms the rate.
Par value = FV $1,000
Years to maturity 25
Periods/year 2
Years periods/year = N 50
YTM 9.25%
Periodic rate = YTM/2 = I/YR 4.625%
Price today = PV $925
PMT, function of N, I/YR, PV, and FV = semiannual pmt $42.38
Annual coupon payment = semiannual payment 2 = $84.75
Coupon rate = Annual coupon payment / Par value = 8.48%

PTS: 1 DIF: HARD NAT: Analytic skills

LOC: Students will acquire an understanding of stocks and bonds.
TOP: TOP: (7-6) Semiannual bond coupon
 Version A

Formula Sheet – Midterm 1

CH4:
FVN = PV (1 + I) N
𝑭𝑽𝑵
PV =
(𝟏+𝑰)𝑵

(𝟏 + 𝑰)𝑵 − 𝟏
𝑭𝑽𝑵 = 𝑷𝑴𝑻[ ]
𝑰
𝑭𝑽𝒅𝒖𝒆 = 𝑭𝑽𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 (𝟏 + 𝑰)
𝑷𝑴𝑻 𝟏
𝑷𝑽𝑶𝑹𝑫 = [𝟏 − ]
𝑰 (𝟏+𝑰)𝑵

𝑷𝑽𝒅𝒖𝒆 = 𝑷𝑽𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 (𝟏 + 𝑰)
𝑷𝑴𝑻
𝑷𝑽𝑷𝑬𝑹𝑷 =
𝑰
𝑺𝒕𝒂𝒕𝒆𝒅 𝒂𝒏𝒏𝒖𝒂𝒍 𝒓𝒂𝒕𝒆 𝑰
𝑰𝑷𝑬𝑹 = =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒑𝒂𝒚𝒎𝒆𝒏𝒕𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓 𝑴
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒑𝒆𝒓𝒊𝒐𝒅𝒔 = (𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔) ∗ (𝑷𝒆𝒓𝒊𝒐𝒅𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓) = 𝑵𝑴
𝑰
FVN = PV (1+ 𝑴)NM
𝑰𝑵𝑶𝑴 M
EFF% = (1+ ) -1
𝑴
𝑵
𝑪𝑭𝒕
𝑷𝑽 = ∑
(𝟏 + 𝑰)𝒕
𝒕=𝟏

CH5:
r = r* + IP + DRP + LP + MRP
𝑵
𝑰𝑵𝑻 𝑴
𝑽𝑩 = ∑ 𝒕 +
(𝟏 + 𝒓 𝒅 ) (𝟏 + 𝒓 𝒅 )𝑵
𝒕=𝟏

𝒄𝒐𝒖𝒑𝒐𝒏 𝒑𝒂𝒚𝒎𝒆𝒏𝒕
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒊𝒆𝒍𝒅 (𝑪𝒀) =
𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒈𝒂𝒊𝒏𝒔 𝒚𝒊𝒆𝒍𝒅 (𝑪𝑮𝒀) =
𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆